Problem 4-10

A combined statement of income and retained earnings for Ayayai Ltd. for the year ended December 31, 2017, follows. (As a private company, Ayayai has elected to follow ASPE.) Also presented are three unrelated situations involving accounting changes and the classification of certain items as ordinary or unusual. Each situation is based on the combined statement of income and retained earnings of Ayayai Ltd.

AyayaiLtd.

Combined Statement of Income and Retained Earnings

For the Year Ended December 31, 2017

Sales revenue$5,730,000

Cost of goods sold2,860,000

Gross profit2,870,000

Selling, general, and administrative expenses1,850,000

Income before income tax1,020,000

Income tax306,000

Income before unusual item714,000

Loss from tornado (net of taxes)499,800

Net income214,200

Retained earnings, January 1714,000

Retained earnings, December 31$928,200

For each of the three unrelated situations, prepare a revised combined statement of income, and retained earnings for Ayayai Ltd. The company has a 30% income tax rate.

Situation 1.In late 2017, the company discontinued its apparel fabric division. The loss on the sale of this discontinued division amounted to $580,000. This amount was included as part of selling, general, and administrative expenses. Before its disposal, the division reported the following for 2017: sales revenue of $1.29 million; cost of goods sold of $645,000; and selling, general, and administrative expenses of $483,750.(Round answers to 0 decimal places, e.g. 5,275.)

Situation 2.At the end of 2017, the company's management decided that the estimated loss rate on uncollectible accounts receivable was too low. The loss rate used for the years 2016 and 2017 was 1.3% of total sales revenue and owing to an increase in the write-off of uncollectible accounts, the rate was raised to 2.0% of total sales revenue. The amount recorded in Bad Debt Expense under the heading Selling, General, and Administrative Expenses for 2017 was $74,490 and for 2016 it was $78,000.(Round answers to 0 decimal places, e.g. 5,275.)

Situation 3.On January 1, 2015, the company acquired machinery at a cost of $590,000. The company adopted the declining-balance method of depreciation at a rate of 20% for this machinery and had been recording depreciation over an estimated life of 10 years, with no residual value. At the beginning of 2017, a decision was made to adopt the straight-line method of depreciation for this machinery. Depreciation for 2017, based on the straight-line method, was included in selling, general, and administrative expenses. (Hint: a change in depreciation method is considered a change in estimate, not a change in accounting policy.)(Round answers to 0 decimal places, e.g. 5,275.)